Alternative Investments: Ares Management Agrees to SEC Settlement

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Ares Management (NYSE: ARES) agreed to settle a complaint from the Securities and Exchange Commission (SEC). Ares is paying a $1 million settlement to the SEC. This will resolve a complaint that Ares failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

The SEC said in the complaint that in 2016, Ares invested several hundred million dollars in client funds in the Portfolio Company in the form of debt and equity. Confidentiality provisions in the loan agreement remained in effect between Ares and the Portfolio Company on a going-forward basis. The equity investment allowed Ares to appoint two directors to the Portfolio Company’s Board of Directors.

Ares Management Settlement

One of Ares’s two representatives on the board was a senior member of the Ares deal team involved in the debt and equity investment. The Ares Representative, along with other members of the deal team, received information from the Portfolio Company that posed a risk that it could be Material Non-Public Information. This information was shared more widely within Ares that was appropriate under the confidentiality provisions in the loan agreement.

According to the SEC complaint, the information concerned, among other things, potential changes in senior management, adjustments to the Portfolio Company’s hedging strategy, efforts to sell an interest in an asset, the Portfolio Company’s desire to sell equity and use proceeds to retire certain debt, and the Portfolio Company’s election, as allowed under the terms of the loan agreement, to pay interest “in-kind” and not in cash.

After receiving this information, Ares then bought more than 1 million shares of the Portfolio Company, or 17%, of additional stock.

Anita B. Bandy, Associate Director in the Division of Enforcement, said in a statement, “Investment advisers and private equity firms that place employees on the boards of public companies bear heightened risks that they will obtain nonpublic material information through their representative occupying dual roles. It is critical for firms like Ares to have proper policies and procedures in place to address these risks and prevent the misuse of information obtained under these special circumstances.”

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